Bringing January to a close, in today’s guest blog Nooman Haque, Silicon Valley Bank, takes a look at the outlook for the sector over the remaining months of 2016.
There are good reasons to hope 2016 will be brighter after the healthcare financial markets ended 2015 in negativity. Broad macroeconomic fears started the decline in September but the sector created its own controversy when Turing’s price rise prompted an unsurprising response from Presidential hopeful Hilary Clinton and a storm engulfed Valeant across several fronts. The issues around Theranos opened the sector to accusations of style over substance and with impeccable timing, Martin Shrekli, the sector’s favourite pantomime villain returned in time for seasonal festivities, arrested for securities fraud in mid-December.
The impact was felt on both sides of The Atlantic; IPOs were pulled and suddenly, the funding climate went into abrupt deterioration. Are there positive signs in 2016 or will we experience a pervasive sectoral hangover?
Firstly, let’s acknowledge the challenges all companies face in going public today. In the US, appetite from some “crossovers” is waning, as many recorded mark-to-market losses and lowered their appetite for further risk. But perversely there’s a crude Darwinian argument here that bodes well: since 2011 equity has been cheap and prices stable (and rising). At times it seemed anybody with an idea and some early scientific results could go public and when these conditions persist, momentum investing is the result. And in such a market prices becomes detached from fundamentals.
Prices convey information in capital markets and it’s essential that those prices are driven as much as possible by fundamentals to give investors the best shot at accurately gauging risk. When momentum exists, the information aspect of prices is diminished and markets are less efficient as a result. This doesn’t help companies or investors.
Conversely, volatility acts as a check on companies and investors by forcing diligence, research and thus more accurate pricing. A high bar for equity ensures a minimum quality level that prevents the weak from flooding the market with their bad price genes. In my view, this doesn’t mean that early stage companies can’t get out, it just means that the risk will be appropriately priced when they go public. In short: you need fear as well as greed for a market to function properly.
This is no consolation to those IPOs caught up in the market turmoil. However the market will lurch to a new mean and I’m confident that whilst some companies won’t find it as easy to go public in 2016, the market will be better for it. And I strongly believe that if we do have a sensibly priced US market with higher average quality, the information that conveys to other international investors will actually make for better UK and European markets.
Originally written for Consilium Strategic Communications